is real estate a safe investment The asset class that continues to flourish: the rise of short-term rentals

Is real estate a safe investment? The flourishing short-term rental market may say so.

The hospitality real estate sector was hit hard by the COVID-19 pandemic, but the short-term rental niche proved to be a stable ship amidst the storm. How could this be, and what forces are still propelling strong growth in the sector? In this article, we’ll break down the fundamentals of the short-term rental investment world’s strengths, explore why the sector continues to demonstrate excellent vital signs, and provide context to answer the million-dollar question: is real estate a safe investment?

Proof of Ongoing High Performance in the Sector

Before we get into the “why” of the sector’s strength, let’s cover just how well the short-term rental market is actually doing. 

Institutional investment in the asset class

Investment firms of all stripes are making serious efforts to acquire additional short-term rental inventory. For instance, short-term rental investor reAlpha is busy making acquisitions toward a stated target of up to $1.5 billion in properties

Performance metrics

Average Length of Stay Increase

For renters, there are strong signals of continued interest as well. While the data shows that the number of listings decreased over the course of the pandemic, the average length of stays actually increased. In New York from May 2020 to March 2021, the average stay increased by a shocking 237 percent. In Los Angeles, the growth over that same time period was 53 percent, while in Denver it was 48 percent. 

Average Daily Rate Increase

On the performance side, things are looking bright as well. Average Daily Rates (ADRs), a crucial performance metric, grew to 24.7 percent above the 2019 figure as of October 2021, demonstrating how much renters are willing to pay for short-term rental stays. Demand, meanwhile, grew by 12.2 percent over the same period.

Factors impacting the flourishing of short-term rentals

Short-term rentals have several important characteristics that have let them stay successful over the course of the pandemic, sometimes in direct response to shortcomings in other property types or the traditional hospitality space itself, and signal further growth as we emerge on the other side.

Shifting traveler demands

Better safety for travelers during the pandemic

First, short-term rentals require less exposure to other people than do traditional hotels. In the process of spending a few nights at a typical hotel, guests would inevitably cross paths with a handful of people (front desk staff, other guests relaxing in the lobby, people at the complimentary breakfast, and beyond). For travelers that were, or still are, hoping to minimize their risk of exposure to COVID-19, short-term rentals often require minimal or even zero close contact with other people, and so are a great option to make use of. 

The rise of remote work

While short-term rentals are great for travelers visiting new places for fun, they’re also often ideal for remote workers. Short-term rentals frequently provide highly usable workspaces, whether that means a simple desk nook next to the bed or a full-on office room of its own. This means the sector is positioned well to take advantage of the enormous growth in remote working since the COVID-19 outbreak began. 

To illustrate the scope of this trend, consider that since 2009, the number of remote workers has grown by an astonishing 159 percent. Meanwhile, from 2020 to the first quarter of 2021, the share of Airbnb stays that were 28 days or longer saw an increase of 10 percent, reflecting that increasing numbers of people are able to meet their daily work needs from a nomadic setting. COVID-19 may be bad news for the office sector, but it’s a different story for short-term rentals. 

Asset class irreplaceability

Additionally, short-term rentals are fundamentally irreplaceable compared to the property types that were hit hardest by the outbreak. Right now there are many conversations about how COVID-19 is negatively impacting various real estate niches. For instance, the coronavirus outbreak led many office employees to begin working from home, jeopardizing the fundamental value proposition of the office itself. Or in the retail world, COVID-19 led to widespread closures across numerous retail brands as shoppers increasingly looked to the internet to help them buy the goods they needed. 

Meanwhile, there is no way around the fact that travelers need housing. As we discussed above, the options are to stick with a traditional hotel, with their far greater numbers of people to run into, or to book a short-term rental with greater flexibility and lower exposure to COVID-19.

Inherent asset flexibility

Investing in short-term rentals allows investors to shift strategies much more rapidly than traditional apartments with typically year-long leases. Short-term rental hosts can quickly change their minimum stay duration requirements to accommodate fluctuations in the market in either direction. For instance, when weekend travel first dropped as a result of the pandemic, many short-term hosts switched to requiring stays of 30 days or longer to keep occupancy high, comply with local regulations, and minimize turnover costs and risks. On the other hand, during times of high demand, hosts have the ability to quickly and responsively raise prices to match market rates and maximize revenue.

Fundamental value appreciation

Finally, it’s important to consider that over the course of the pandemic, single-family homes like those that make for great short-term rentals have also experienced pronounced value appreciation. 2020 actually saw the greatest home price appreciation in America since 2005, with $2.5 trillion of total growth. With short-term rentals, investors aren’t just buying into a valuable potential income stream, but also a physical store of value as well.

is real estate a safe investment

As we’ve discussed, the short-term rental sector has stayed strong through the pandemic and beyond due to its irreplaceability as a sector, the benefits it offers renters over traditional hotel stays, and the continued value growth of short-term rental buildings themselves. While the market may rise and fall over time, most of these factors are integral to the very nature of short-term rentals themselves. 

Interested in seeing how a short-term rental investment could fit into your own lifestyle? Check out how much income any address could generate with our free revenue estimator, or drop your details below and we’ll help you get started.

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